5 Buying Opportunities Rallying Off Multi-Year Lows With Room To Run

The Gist

I have been pounding the table on basic materials stocks for the past few months. I am constantly looking for opportunities in the market. The basic materials sector has been in the dog house for quite some time now. The gloomy global growth picture painted by Europe, China and the U.S. has wreaked havoc on many basic materials stocks. Nevertheless, the tide seems to be turning and a stealth rally in the sector has been progressing since June. See chart below of the Materials Select Sector SPDR (NYSEARCA:XLB) provided by Finviz.com.

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Catalyst's for the sector are China's announcement it would invest 150 billion in infrastructure and, according to data from The Steel Index Ltd., iron ore for immediate delivery in China rose 6 percent earlier this month to $110.40 a ton, the biggest gain in a month. This news coupled with the quantitative easing and stimulus actions by the ECB, Fed and many other central banks has sparked a rally in the basic materials sector.

The Goods

These stocks are on my radar because they had strong fundamental data and some beat recent earnings estimates. Certain stocks are trading at an extreme discount to the historical valuations based on an unprecedented downturn in global growth.

In the following sections we will perform a review of the fundamental and technical state of each company to determine if we should stay with the position, sell out or simply manage the position by taking profits. The following table depicts summary statistics and Tuesday's performance for the stocks. The following charts are provided by Finviz.com.

The company is trading 45% below its 52-week high and has 11% upside based on the consensus mean target price of $6.27 for the company. AK Steel was trading Tuesday for $5.68, up nearly 7% for the day.

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AK Steel has some fundamental positives. The company has a forward P/E of 13.30. AKS is expecting EPS to almost double next year. The company trades for approximately 10% of sales. EPS for the next five years is projected to be 22%.

Technically, the stock has been in a well-defined trading range since June. The stock has moved between a high of $6.50 and low of $5 since June. The stock has bounced off the $5 mark four times in the last year. The stock recently broke through major resistance at the 50 day sma and is now testing resistance at the top of the long-term trading range.

AK Steel is up today based on a recent announcement that it would increase prices for all carbon steel products by $50 per ton. The company is down over ten-fold from its 2008 high of $70. The risk/reward is favorable at this point. I see this as a buying opportunity and a good entry point for the stock.

ANR is trading 67% below its 52-week high and has 7% upside potential based on the consensus mean target price of $10.33 for the company. ANR was trading Tuesday for $9.73, up almost 4% for the day.

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Fundamentally, ANR has some positives. EPS for the next five years is expected to rise by 20%. ANR is trading for approximately a 60% discount to book value. On the negative side, the company has a net profit margin of -41%; a negative ROE of -45.70% and EPS is dropping substantially quarter over quarter.

Technically, ANR looks strong. Alpha is on the comeback trail and is up 48% for the month. Alpha has a beta of 1.67. The stock has breached major long-term resistance at the $9 mark.

The risk/reward ratio seems favorable at this point. The company is down over thirteen fold from its 2008 high of $100. Alpha popped 7 percent Friday when Alpha reported narrowed losses and posted much better earnings than were expected for the third quarter. The company is doing a great job of cutting costs and rightsizing production based on the current anemic demand. I like it here.

The company is trading 51% below its 52-week high and has 28% upside potential based on the consensus mean target price of $48.50 for the company. Cliffs was trading Tuesday for $38.03, up 2.4% for the day.

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Fundamentally, Cliffs has several positives. Cliffs pays a dividend with a yield of 6.73%. The company has a forward P/E of 9.69. Cliffs is trading for slightly less than book value. EPS is up over 50% this year. The company has a net profit margin of 16.28%.

Technically, Cliffs looks like it hit an inflection point at the beginning of September marking a trend change. All the major moving averages are starting to change the angle of decent and flatten out somewhat. The stock recently took a serious nose dive after missing earnings. Cliffs reported third-quarter results that missed analysts' estimates as the price of steelmaking raw-materials dropped.

The significant dividend yield combined with the fact that central bank printing presses around the globe are working overtime make the risk/reward ratio on this stock favorable. There are rumors of Cliffs being a potential takeover target, but basing a decision on the rumor mill usually does not work out. Nonetheless, I like the stock here. You have to buy low to sell high.

The company is trading 15% below its 52-week high and has 23% upside potential based on the consensus mean target price of $49.79 for the company. Freeport was trading Tuesday for $40.32, up over 2% for the day.

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Fundamentally, Freeport has several positives. Freeport pays a dividend yielding 3.17%. The company has a forward P/E of 8.40. Freeport is trading for 2.19 times book value. EPS next year is expected to rise by 44.62%. The company has a net profit margin of 22.08% and an ROE of 18%.

Technically, Freeport has been in a well-defined uptrend since mid-June. The stock went parabolic after the Fed announced a new round of QE was forthcoming. The recent pullback is healthy for the stock technically. At the beginning of October the coveted golden cross was achieved where the 50-day sma crosses above the 200-day sma. If you follow my articles you will know this has been a very effective indicator for picking winners for me. The stock is a buying opportunity here as it hugs the 50-day sma. This is an ideal time to start a long-term position in Freeport.

The company is trading 31% below its 52-week high and has 14% potential upside based on the analysts' consensus mean target price of $25.37 for the company. US Steel was trading Tuesday for $22.29, up nearly 6% for the day.

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Fundamentally, US Steel has some positives. The company has a forward P/E of 11.06. US Steel is trading for 79% of book value. EPS next year is expected to rise by 82%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.

Technically, the stock looks good. The stock tested resistance at the $18 level four times over the past few months and recently broke through resistance at the 50-day sma.

The company is down almost seven-fold from its 2008 high of $180. I see this as a chance to get into the stock before things start to really turn around. US Steel is up today in congruence with AK Steel after their announcement of a price increase. The stock is a buy here.

The Bottom Line

A vast sell-off of the basic materials sector based on unprecedented macroeconomic and geopolitical global growth anxieties has occurred over the last four years. This has created some tremendous buying opportunities in the space. A stealth rally has been going on in the sector since June, yet there are some laggards in the sector. I posit the stocks covered in this article have not experienced the full effect of the rally and still have room to run.

Disclosure: I am long ANR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.

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